Reserve Bank of India’s Monetary Policy Committee is bearing the brunt of rising inflation and has urged the government for more fiscal action. The six member committee completing its four year term has acknowledged that rising inflation has affected its ability to support growth. During its tenure, the committee has been able to restrict inflation with the limits of 2 to 6 percent. However, as it completes its term, the consumer price growth has exceeded the set highest limit of 6 percent.
If inflation exceeds the upper limit of the target band for three consecutive quarters, the RBI Act requires Governor Shaktikanta Das to write a letter to the government to explain why the MPC failed to meet its goal.
Average inflation in each of the first two quarters has already exceeded 6 percent and will likely remain elevated after consumer prices grew 6.93 percent in July, says a report by Business Standard.
According to a report by Reuters, the MPC on August 6 unanimously decided to hold interest rates steady while keeping its stance accommodative as long as necessary to revive growth and mitigate the impact of COVID-19 while ensuring inflation remains within target. Despite the dovish tone, the minutes suggest the bank sees little room for rate cuts in the current environment.
“Inflation surprises of recent months are undermining the MPC’s actions and stymieing its resolve to do what it takes to revive growth and mitigate the impact of COVID-19 on the economy,” said Deputy Governor Michael Patra.
While some are of the opinion that MPC took some knee-jerk decisions surprising the market, most economists agree that the committee was successful in anchoring price expectations in a country that was reeling under the pressure of double digit inflation even before the pandemic.
“The outgoing MPC worked successfully in an environment of domestic challenges, from demonetization to addressing an economic slowdown, while keeping price stability at the center of its deliberation,” said Rahul Bajoria, Senior India Economist at Barclays Plc in Mumbai. “While recent data has turned adverse, by and large, the inflation targeting framework has been strengthened considerably in the new regime.”